<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 1-4095
McDERMOTT INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 74-1032246
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(State of Incorporation) (I.R.S. Employer Identification No.)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
Post Office Box 60035, New Orleans, Louisiana 70160-0035
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-4411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Common Stock, par value $1 per share, outstanding as of
October 21, 1994 was 3,600.
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M c D E R M O T T I N C O R P O R A T E D
I N D E X - F O R M 10 - Q
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
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Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet - September 30, 1994
and March 31, 1994 4
Consolidated Statement of Income (Loss) and Retained
Earnings (Deficit) - Three Months Ended and Six Months
Ended September 30, 1994 and September 30, 1993 6
Consolidated Statement of Cash Flows - Six Months
Ended September 30, 1994 and September 30, 1993 7
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II - OTHER INFORMATION
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Item 6 - Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
2
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PART I
McDERMOTT INCORPORATED
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
3
<PAGE> 4
McDERMOTT INCORPORATED
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1994
ASSETS
<TABLE>
<CAPTION>
9/30/94 3/31/94
------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 21,695 $ 47,364
Short-term investments 129,532 989
Accounts receivable-trade 271,045 255,441
Accounts receivable-other 51,735 58,787
Insurance recoverable-current 113,194 110,200
Accounts receivable from affiliates 23,410 11,428
Contracts in progress 228,017 214,649
Inventories 65,298 66,214
Deferred income taxes 100,639 98,627
Other current assets 63,509 35,462
- --------------------------------------------------------------------------------------------------------------
Total Current Assets 1,068,074 899,161
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Property, Plant and Equipment, at Cost: 1,449,897 1,415,605
Less accumulated depreciation 956,806 932,722
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Net Property, Plant and Equipment 493,091 482,883
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Investments - 130,121
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Insurance Recoverable 805,048 876,846
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Investment in McDermott International, Inc. 609,042 610,392
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Prepaid Pension Costs 235,799 225,239
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Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $87,533,000 at September 30, 1994
and $84,170,000 at March 31, 1994 139,701 143,064
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Other Assets 102,059 133,020
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TOTAL $ 3,452,814 $ 3,500,726
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
9/30/94 3/31/94
------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 338,695 $ 21,528
Accounts payable 104,702 141,412
Accounts payable to affiliates 35,953 17,373
Environmental and products liabilities-current 128,693 122,361
Accrued employee benefits 90,499 93,487
Accrued interest payable 36,581 44,619
Accrued liabilities - other 112,539 109,844
Advanced billings on contracts 111,330 135,505
U.S. and foreign income taxes 5,147 40,342
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Total Current Liabilities 964,139 726,471
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Long-Term Debt 434,736 584,532
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Accumulated Postretirement Benefit Obligation 377,554 370,828
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Environmental and Products Liabilities 942,144 1,013,251
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Other Liabilities 119,902 121,178
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Contingencies
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Minority Interest 15,558 15,691
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Redeemable Preferred Stocks:
Series A $2.20 cumulative convertible, $1.00 par value;
at redemption value 88,089 88,089
Series B $2.60 cumulative, $1.00 par value;
at redemption value 91,630 108,583
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Total Redeemable Preferred Stocks 179,719 196,672
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Stockholder's Equity:
Common stock, par value $1.00 per share, 3,700 shares
authorized and issued, 3,600 shares outstanding 4 4
Capital in excess of par value 591,926 589,085
Deficit (162,413) (104,859)
Minimum pension liability (620) (620)
Net unrealized loss on investments (1,025) -
Cumulative foreign exchange translation adjustments (8,810) (11,507)
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Total Stockholder's Equity 419,062 472,103
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TOTAL $ 3,452,814 $ 3,500,726
==============================================================================================================
</TABLE>
5
<PAGE> 6
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/94 9/30/93 9/30/94 9/30/93
------- ------- ------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 543,785 $ 576,015 $1,112,477 $1,022,088
- --------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 495,734 502,258 1,003,386 891,314
Depreciation and amortization 15,884 15,727 37,747 36,273
Selling, general and
administrative expenses 46,276 43,183 85,851 81,789
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557,894 561,168 1,126,984 1,009,376
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(14,109) 14,847 (14,507) 12,712
Equity in Income of Investees 1,633 2,904 4,130 5,985
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Operating Income (Loss) (12,476) 17,751 (10,377) 18,697
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Other Income (Expense):
Interest income 2,555 680 5,013 2,227
Interest expense (11,440) (14,417) (20,788) (31,531)
Other-net (16,136) (1,627) (19,610) (5,731)
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(25,021) (15,364) (35,385) (35,035)
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Income (Loss) before Provision for
Income Taxes and Cumulative Effect
of Accounting Changes (37,497) 2,387 (45,762) (16,338)
Provision for Income Taxes 3,298 584 4,031 2,685
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Income (Loss) before Cumulative Effect
of Accounting Changes (40,795) 1,803 (49,793) (19,023)
Cumulative Effect of Accounting
Changes - - (512) (100,750)
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Net Income (Loss) (40,795) 1,803 (50,305) (119,773)
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Retained Earnings (Deficit) -
Beginning of Period (118,161) (87,621) (104,859) 37,926
Deduct Cash Dividends - Preferred
Stocks 3,457 3,954 7,249 7,925
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Deficit - End of Period $(162,413) $(89,772) $(162,413) $(89,772)
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1994
DECREASE IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/94 9/30/93
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (50,305) $ (119,773)
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 37,747 36,273
Provision for deferred taxes 49,489 24,271
Cumulative effect of accounting changes 512 100,750
Other 1,515 (2,539)
Changes in assets and liabilities, net of
effects from acquisition:
Accounts receivable (18,713) 65,998
Net contracts in progress and advance billings (36,824) (65,737)
Accounts payable (19,204) (13,623)
Accrued interest (8,038) (1,567)
Accrued liabilities 2,279 (39,869)
Income taxes (32,470) (32,265)
Other, net (50,100) (21,314)
Proceeds from insurance for products liabilities claims 53,823 49,663
Payments of products liabilities claims (61,557) (55,797)
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NET CASH USED IN OPERATING ACTIVITIES (131,846) (75,529)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Delta Catalytic Corporation - (28,249)
Purchases of property, plant and equipment (42,316) (25,739)
Purchases of government obligations, under
reverse repurchase agreement with an affiliate - (646,685)
Sales of government obligations, under
reverse repurchase agreement with an affiliate - 725,545
Other 5,804 1,882
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NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (36,512) 26,754
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</TABLE>
7
<PAGE> 8
CONTINUED
DECREASE IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/94 9/30/93
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings $ 167,527 $ (2,871)
Payment of long-term debt (275) (191,227)
Issuance of long-term debt - 92,475
Capital contribution received from International - 100,000
Dividends paid (7,249) (7,925)
Repurchase of preferred stock (16,753) (3,586)
Other (1,366) 2,012
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NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 141,884 (11,122)
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EFFECTS OF EXCHANGE RATE CHANGES ON CASH 805 (933)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (25,669) (60,830)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 47,364 71,549
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,695 $ 10,719
==============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 28,825 $ 33,100
Income taxes $ 16,473 $ 4,091
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
McDERMOTT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
AND AT SEPTEMBER 30 AND MARCH 31, 1994
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of McDermott
Incorporated, a Delaware corporation which is a subsidiary of McDermott
International, Inc., and all subsidiaries and controlled joint ventures.
Investments in joint venture and other entities in which McDermott Incorporated
has a 20% to 50% interest are accounted for on the equity method. Differences
between the cost of equity method investments and the amount of underlying
equity in net assets of the investees are amortized systematically to income.
All significant intercompany transactions and accounts have been eliminated.
Certain amounts previously reported have been reclassified or restated to
conform with the presentation at September 30, 1994. Results for the three and
six months ended September 30, 1993 have been restated to reflect the adoption
of Emerging Issues Task Force ("EITF") Issue No. 93-5 (See Note 2).
Unless the context otherwise requires, hereinafter, the "Delaware Company" will
be used to mean McDermott Incorporated and its consolidated subsidiaries
(including Babcock & Wilcox Investment Company and its principal subsidiary,
The Babcock & Wilcox Company), and "International" will be used to mean
McDermott International, Inc., a Panamanian corporation.
In the opinion of management, all adjustments necessary for a fair statement of
the results have been recorded. Such adjustments are of a normal, recurring
nature except for a loss related to the reduction of estimated products
liabilty asbestos claims recoveries from insurers ($14,478,000) included in the
three and six months ended September 30, 1994; a reduction in accrued interest
expense ($5,600,000 and $11,300,000, respectively) due to settlement of
outstanding tax issues included in the three and six months ended September 30,
1994; a favorable warranty reserve adjustment ($6,820,000, net of tax of
$4,180,000) included in the six months ended September 30, 1993; and the
cumulative effect of the accounting changes included in the six months ended
September 30, 1994 and 1993. The results for interim periods are not
necessarily indicative of results to be expected for the year.
9
<PAGE> 10
NOTE 2 - CHANGES IN ACCOUNTING POLICIES
Products Liabilities - The Delaware Company has an agreement with a majority of
its principal insurers concerning the method of allocation of products
liability asbestos claim payments to the years of coverage. However, amounts
allocable to policy year 1979 are excluded from this agreement, and the
Delaware Company's ability to recover these amounts, and amounts allocable to
certain insolvent insurers, is only reasonably possible. Thus, a provision for
these estimated future costs was recognized during the third quarter of fiscal
year 1994, effective April 1, 1993, as a change in accounting principle,
reflecting the Delaware Company's adoption of EITF Issue No. 93-5. EITF Issue
No. 93-5 no longer permits companies to offset, for recognition purposes,
reasonably possible recoveries against probable losses, which had been the
Delaware Company's prior practice. The cumulative effect of the accounting
change at April 1, 1993 was a charge of $100,750,000 (net of income taxes of
$54,250,000). The adoption of this provision of EITF Issue No. 93-5 resulted
in a decrease in Loss before Cumulative Effect of Accounting Change and an
increase in Net Loss of $7,513,000, and $93,237,000, respectively, for the six
months ended September 30, 1993 and an increase in Net Income of $7,980,000 for
the quarter ended September 30, 1993. In addition, the Delaware Company has
received notice that provisional liquidators have been appointed to a
London-based products liability asbestos insurer and certain of its
subsidiaries. As a result, a loss of $14,478,000 related to the reduction of
estimated products liability asbestos claims recoveries was recognized in the
September 30, 1994 quarter, and was included in Other-net expense. The Delaware
Company's estimated future costs relating to policy year 1979 and insolvent
insurers are derived from its loss history and constitute management's best
estimate of such future costs. At September 30, 1994, the estimated amount of
future costs allocable to insolvent insurers and the policy year 1979 was
$142,304,000. Inherent in the estimate of such future costs are expected
trends in claim severity and frequency and other factors, including
recoverability from insurers, which may vary significantly as claims are filed
and settled. Accordingly, the ultimate loss may differ materially from the
amount provided in the consolidated financial statements.
During the first quarter of fiscal year 1995, the Delaware Company adopted the
provisions of the Financial Accounting Standards Board ("FASB") Interpretation
No. 39, which requires the Delaware Company to present separately in the
balance sheet its estimated liabilities for
10
<PAGE> 11
pending and future non-employee products liability asbestos claims and related
estimated insurance recoveries. Accordingly, the accompanying consolidated
balance sheet at March 31, 1994 and the consolidated statement of cash flows
for the six months ended September 30, 1993 have been restated to conform with
the September 30, 1994 presentation. Of the total estimated liability at
September 30, 1994, less than $100,000,000 has been asserted. The adoption of
FASB Interpretation No. 39 did not have any effect on earnings.
Postemployment Benefits - Effective April 1, 1994, the Delaware Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers'
Accounting for Postemployment Benefits," in accounting for disability benefits
and other types of benefits paid to employees, their beneficiaries and covered
dependents after active employment, but before retirement. The cumulative
effect as of April 1, 1994 of this change in accounting was to increase net
loss by $512,000 (net of income taxes of $287,000). Other than the cumulative
effect, the accounting change had no material effect on the results of the six
months ended September 30, 1994. Prior to April 1, 1994, the Delaware Company
recognized the cost of providing most of these benefits on a cash basis. Under
this new principle of accounting, the cost of these benefits is accrued when it
becomes probable that such benefits will be paid and when sufficient
information exists to make reasonable estimates of the amounts to be paid. As
required by the Statement, prior period financial statements have not been
restated to reflect this change in accounting principle.
Investments - In May 1993, the FASB issued SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Delaware Company
adopted the provisions of this new standard for investments held as of or
acquired after April 1, 1994. Based on current portfolio management practices,
the Delaware Company's investments are classified as available for sale and are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholder's equity. The opening
balance of stockholder's equity was decreased by $1,480,000 to reflect the net
unrealized holding losses on the Delaware Company's investment securities which
were previously carried at amortized cost. In accordance with the Statement,
prior period financial statements have not been restated to reflect this change
in accounting principle.
11
<PAGE> 12
NOTE 3 - INVENTORIES
Consolidated inventories at September 30, 1994 and March 31, 1994 are
summarized below:
<TABLE>
<CAPTION>
September 30, March 31,
1994 1994
------------- -----------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 37,950 $ 40,281
Work in Progress 18,033 17,566
Finished Goods 9,315 8,367
- ---------------------------------------------------------------------------------------------
$ 65,298 $ 66,214
=============================================================================================
</TABLE>
NOTE 4 - SEGMENT REPORTING INFORMATION
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/94 9/30/93 9/30/94 9/30/93
-------- ------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Power Generation Systems and Equipment $379,235 $391,732 $ 783,698 $ 736,169
Marine Construction Services 164,785 184,401 329,173 286,318
Intersegment Transfer Eliminations (235) (118) (394) (399)
- ---------------------------------------------------------------------------------------------------
Total Revenues $543,785 $576,015 $1,112,477 $1,022,088
===================================================================================================
OPERATING INCOME (LOSS):
Segment Operating Income (Loss):
Power Generation Systems and Equipment $ 2,585 14,568 $ 16,068 $ 23,451
Marine Construction Services (5,497) 10,476 (10,073) 11,457
- ---------------------------------------------------------------------------------------------------
Total Segment Operating Income (Loss) (2,912) 25,044 5,995 34,908
- ---------------------------------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
Power Generation Systems and Equipment (44) 2,500 2,469 4,559
Marine Construction Services 1,677 404 1,661 1,426
- ---------------------------------------------------------------------------------------------------
Total Equity in Income of Investees 1,633 2,904 4,130 5,985
- ---------------------------------------------------------------------------------------------------
General Corporate Expenses (11,197) (10,197) (20,502) (22,196)
- ---------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $(12,476) $ 17,751 (10,377) $ 18,697
===================================================================================================
</TABLE>
12
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NOTE 5 - PROPOSED SALE OF OPERATIONS
On June 2, 1994, International announced a plan to form a new company, J. Ray
McDermott, S.A., that would combine the worldwide marine construction
businesses of McDermott International with those of Offshore Pipelines, Inc.
("OPI"). Under the terms of the proposed agreement, International would
contribute substantially all of its marine construction assets and businesses
to the new company, including those of the Delaware Company. It is anticipated
that the Delaware Company will sell substantially all of its marine
construction assets and businesses to International, which will then make the
contribution to J. Ray McDermott, S.A. McDermott International has completed
due diligence and is currently holding discussions with regulatory agencies,
and OPI has filed preliminary documents with the Securities and Exchange
Commission in connection with this proposed transaction. The proposed
transaction is subject to the approval of OPI shareholders and these regulatory
agencies.
13
<PAGE> 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1994 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1993
Power Generation Systems and Equipment's revenues decreased $12,497,000 to
$379,235,000. This was primarily due to lower revenues from defense and
space-related products (other than nuclear fuel assemblies and reactor
components), extended scope of supply and fabrication of industrial boilers,
and plant enhancement projects. These decreases were partially offset by
higher revenues from fabrication and erection of fossil fuel steam and
environmental control systems.
Power Generation Systems and Equipment's segment operating income decreased
$11,983,000 to $2,585,000. The decrease was primarily due to lower volume and
margins on extended scope of supply and fabrication of industrial boilers, and
defense and space-related products (other than nuclear fuel assemblies and
reactor components). There were also lower margins on replacement parts,
nuclear fuel assemblies and reactor components for the U.S. Government and
fabrication and erection of fossil fuel steam and environmental control
systems. These decreases were partially offset by favorable margins on plant
enhancement projects.
Power Generation Systems and Equipment's equity in income (loss) of investees
decreased $2,544,000 to a loss of $44,000 from income of $2,500,000 primarily
due to a provision for loss on discontinuing a domestic joint venture.
Backlog for this segment at September 30, 1994 was $2,060,170,000 compared to
$2,790,052,000 at September 30, 1993. At September 30, 1994, this segment's
backlog with the U.S. Government was $701,840,000 (of which $20,690,000 had
not been funded). U.S. Government budget reductions have negatively affected
this segment's government operations, and backlog at September 30, 1994 and
1993 reflects the impact of Congressional budget reductions on the advanced
solid rocket motor and super conducting super collider projects. The current
competitive economic environment has also negatively affected demand for other
industrial related product lines and these markets are expected to remain very
competitive.
14
<PAGE> 15
The current competitive economic environment and uncertainties created by
passage of the Energy Policy Act of 1992 and the Clean Air Act Amendments of
1990 have caused U.S. utilities to defer repairs and refurbishments on existing
plants. However, the Clean Air Act has created demand for environmental
control equipment and related plant enhancements. Most utilities have already
purchased equipment to comply with Phase I of the Clean Air Act, and they will
purchase equipment to comply with Phase II deadlines in a gradual manner,
spread out over the next several years as various deadlines approach. Electric
utilities in Asia are active purchasers of large, new baseload generating
units, due to the rapid growth of the Pacific Rim economies and to the small
existing stock of electrical generating capacity in most developing countries.
Marine Construction Services' revenues decreased $19,616,000 to $164,785,000
primarily due to lower volume at Delta Catalytic Corporation ("DCC")
and in fabrication operations. These decreases were partially offset
by higher volume in marine operations.
Marine Construction Services' segment operating income (loss) decreased
$15,973,000 to a loss of $5,497,000 from income of $10,476,000 primarily due to
higher operating expenses, and lower volume and margins in DCC's operations.
These decreases were partially offset by higher volume and margins in marine
operations.
Marine Construction Services' equity in income of investees increased
$1,273,000 to $1,677,000 primarily due to improved operating results of a
Mexican joint venture.
Backlog for this segment at September 30, 1994 was $481,542,000 as compared to
$354,007,000 at September 30, 1993. This segment's markets are expected to
remain at a low level in the U.S. during fiscal year 1995. The overcapacity of
marine equipment and constraints on customer capital expenditure programs will
continue to result in a competitive environment and put pressure on profit
margins.
General corporate expenses increased $1,000,000 to $11,197,000 primarily due to
timing of expenses and charges related to certain cost reduction initiatives
that were recognized in the current period.
15
<PAGE> 16
Interest income increased $1,875,000 to $2,555,000 primarily due to increased
investments in government obligations and other investments.
Interest expense decreased $2,977,000 to $11,440,000 primarily due to a
reduction in accrued interest on proposed tax deficiencies, partially offset by
changes in debt obligations and interest rates prevailing thereon.
Other-net expense increased $14,509,000 to $16,136,000 primarily due to a loss
related to the reduction of estimated products liability asbestos claim
recoveries from insurers and higher bank fees and discounts on the sale of
certain accounts receivable in the current period and the settlement of a
lawsuit in the prior period.
The provision for income taxes increased by $2,714,000 to $3,298,000 while the
income (loss) before the provIsion for income taxes decreased by $39,884,000 to
a loss of $37,497,000 from income of $2,387,000. The increase in income tax is
primarily due to a limitation on the recognition of income tax benefits on
losses in the U.S.
16
<PAGE> 17
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1994 VS. SIX MONTHS
ENDED SEPTEMBER 30, 1993
Power Generation Systems and Equipment's revenues increased $47,529,000 to
$783,698,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, repair and
alteration of existing fossil fuel steam systems, and nuclear fuel assemblies
and reactor components to the U.S. Government. These increases were partially
offset by lower revenues from extended scope of supply and fabrication of
industrial boilers, defense and space-related products (other than nuclear fuel
assemblies and reactor components), plant enhancement projects and replacement
parts.
Power Generation Systems and Equipment's segment operating income decreased
$7,383,000 to $16,068,000. The decrease was primarily due to lower volume and
margins on extended scope of supply and fabrication of industrial boilers, and
defense and space-related products (other than nuclear fuel assemblies and
reactor components). There were also lower margins on replacement parts, and
repair and alteration of existing fossil steam systems as well as a favorable
warranty reserve adjustment recorded in the prior year. These decreases were
partially offset by higher volume on fabrication and erection of fossil fuel
steam and environmental control systems and higher volume and margins on
nuclear fuel assemblies and reactor components for the U.S. Government.
Power Generation Systems and Equipment's equity in income of investees
decreased $2,090,000 to $2,469,000 primarily due to a provision for loss on
discontinuing a domestic joint venture.
Marine Construction Services' revenues increased $42,855,000 to $329,173,000
primarily due to the inclusion of DCC's revenues for the entire six months in
the current period (DCC was acquired in June 1993) and higher volume in marine
operations. These increases were partially offset by lower volume in
fabrication operations.
Marine Construction Services' segment operating income (loss) decreased
$21,530,000 to a loss of $10,073,000 from income of $11,457,000. The decrease
was primarily due to higher operating expenses, lower volume and margins in
fabrication operations, and lower operating results from DCC's operations.
These decreases were partially offset by higher volume and margins in marine
operations.
17
<PAGE> 18
Marine Construction Services' equity in income of investees increased $235,000
to $1,661,000 primarily due to improved operating results of a Mexican joint
venture, partially offset by losses in a Canadian joint venture.
General corporate expenses decreased $1,694,000 to $20,502,000 primarily due to
timing of expenses and higher charges related to certain cost reduction
initiatives in the prior period.
Interest income increased $2,786,000 to $5,013,000 primarily due to increased
investments in government obligations and other investments.
Interest expense decreased $10,743,000 to $20,788,000 primarily due to a
reduction in accrued interest on proposed tax deficiencies.
Other-net expense increased $13,879,000 to $19,610,000 primarily due to a loss
related to the reduction of estimated products liability asbestos claim
recoveries from insurers and higher bank fees and discounts on the sale of
accounts receivable in the current period, and the settlement of a lawsuit in
the prior period.
The provision for income taxes increased by $1,346,000 to $4,031,000 while the
loss before the provision for income taxes and cumulative effect of accounting
changes increased by $29,424,000 to $45,762,000. The increase in income taxes
is primarily due to a limitation on the recognition of income tax benefits on
losses in the U.S.
Net loss decreased $69,468,000 to $50,305,000 reflecting the cumulative effect
of the adoption of Statement of Financial Accounting Standards ("SFAS") No.
112, "Employers' Accounting for Postemployment Benefits," of $512,000 in the
current year and the cumulative effect of the accounting change for
non-employee products liability asbestos claims of $100,750,000 in the prior
year, in addition to the other items mentioned above.
Liquidity and Capital Resources
During the six months ended September 30, 1994, the Delaware Company's cash and
cash equivalents decreased $25,669,000 to $21,695,000 and total debt increased
$167,371,000 to $773,431,000, primarily from short-term borrowings of
$167,527,000. During this period, the Delaware Company used cash of
$131,846,000 in operating activities, $16,753,000 for the repurchase of Series
B Preferred Stock to satisfy future sinking fund requirements,
18
<PAGE> 19
$7,249,000 for cash dividends on the Delaware Company's preferred stocks and
$42,316,000 for additions to property, plant and equipment. Increases in net
contracts in progress and advance billings resulted primarily from the timing
of billings and costs incurred on Power Generation Systems and Equipment
segment contracts, both foreign and domestic.
Pursuant to an agreement with a majority of its principal insurers, the
Delaware Company negotiates and settles products liability asbestos claims from
non-employees and bills these amounts to the appropriate insurers. As a result
of collection delays inherent in this process, reimbursement is usually delayed
for three months or more. The number of claims, which management believes
peaked in fiscal year 1990, has declined moderately. However, the average
amount of these claims (historical average of less than $3,000 per claim) has
continued to rise. Claims paid during the three and six months ended September
30, 1994 were $30,107,000 and $61,557,000, respectively, including $3,013,000
and $4,907,000, respectively, applicable to insolvent insurers and $1,235,000
and $2,320,000, respectively, relating to the policy year 1979. As a result of
the adoption of FASB Interpretation No. 39 (see Note 2 to consolidated
financial statements), the Delaware Company has presented separately in the
balance sheet its estimated liabilities for pending and future non-employee
products liability asbestos claims and related estimated insurance recoveries.
At September 30, 1994, Accounts receivable-other includes receivables of
$29,586,000 that have been billed to insurers for reimbursement of settled
claims. In addition, the Delaware Company has received notice that provisional
liquidators have been appointed to a London-based products liability asbestos
insurer and certain of its subsidiaries. As a result, a loss of $14,478,000
related to the reduction of estimated product liability asbestos claim
recoveries was recognized in the September 30, 1994 quarter, and was included
in Other-net expense. The Delaware Company's estimated future costs relating
to policy year 1979 and insolvent insurers are derived from its loss history
and constitute management's best estimate of such future costs. At September
30, 1994, the estimated amount of future costs allocable to insolvent insurers
and the policy year 1979 was $142,304,000. Inherent in the estimate of such
future costs are assumptions which may vary significantly as claims are filed
and settled. Accordingly, the amount ultimately paid may differ materially
from the amount provided in the consolidated financial statements. Settlement
of the liability is expected to occur over the next 30 years. The collection
delays, and the amount of claims paid that are related to insolvent insurance
19
<PAGE> 20
carriers and the policy year 1979 have not had a material adverse effect upon
the Delaware Company's liquidity, and management believes, based on information
currently available, that they will not have a material adverse effect on
liquidity in the future.
The Delaware Company's expenditures for property, plant and equipment were
$42,316,000 for the six months ended September 30, 1993 compared with
$25,739,000 for the prior year and were incurred primarily to purchase a barge,
which was formerly leased, for $15,010,000 and to maintain existing facilities.
At September 30, and March 31, 1994, The Babcock & Wilcox Company had sold,
with limited recourse, an undivided interest in a designated pool of qualified
accounts receivable of approximately $170,000,000, under the terms of its
agreement with a U.S. bank. The maximum sales limit available under the
agreement, which expires on December 31, 1997 is $225,000,000.
At September 30 and March 31, 1994, the Delaware Company had available to it
various uncommitted short-term lines of credit from banks totalling
$208,418,000 and $204,699,000, respectively. Borrowings outstanding against
these facilities at September 30 and March 31, 1994 were $134,688,000 and
$15,519,000, respectively. In addition, The Babcock & Wilcox Company has
available to it a $128,000,000 unsecured and committed revolving credit
facility. Loans outstanding under the revolving credit facility may not exceed
the banks' commitments thereunder. In addition, it is a condition to borrowing
under the revolving credit facility that the borrower's consolidated net
tangible assets exceed a certain level. At September 30, 1994, The Babcock &
Wilcox Company had borrowings against this line of credit of $45,000,000.
There were no borrowings against this facility at March 31, 1994. DCC had
available from a certain Canadian bank an unsecured and committed revolving
credit facility of $14,925,000 which expires on May 31, 1997. At September 30,
1994, borrowings outstanding against this facility were $3,358,000. There were
no borrowings outstanding against this facility at March 31, 1994.
The Delaware Company maintains an investment portfolio, consisting primarily of
corporate bonds, which is classified as available for sale under SFAS No. 115
(See Note 2 to the consolidated financial statements). The fair value of
short-term investments at September 30, 1994 was $129,532,000 (amortized cost
$131,108,000). The net unrealized loss on the
20
<PAGE> 21
current investment portfolio, net of income tax effect, was $1,025,000 at
September 30, 1994.
The Delaware Company is restricted, as a result of covenants in certain
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
At September 30, 1994, substantially all of the net assets of the Delaware
Company were subject to such restrictions. At September 30, 1994, the most
restrictive of these covenants with respect to the payment of dividends by the
Delaware Company would prohibit the payment of dividends other than current
dividends on existing preferred stock.
Effective February 1, 1989, the Delaware Company and a subsidiary of
International, McDermott International Investments Co., Inc. ("MIICO"),
entered into a reverse repurchase agreement whereby either party acting as a
"buyer" would purchase for cash certain U.S. Government obligations owned by
the other party acting as a "seller", and, at the date of purchase, the
"seller" would agree to repurchase the same securities at a set price
(including accrued interest) at a future specified date. No amounts were
outstanding under this agreement at September 30 or March 31, 1994.
The Delaware Company and MIICO are parties to an agreement pursuant to which
the Delaware Company may borrow up to $150,000,000 from MIICO at interest rates
computed at the applicable federal rate determined by the IRS. There were no
borrowings against this agreement at September 30 or March 31, 1994.
As described in Note 5 to the consolidated financial statements, International
plans to contribute substantially all of its marine construction assets and
businesses (including those currently held by the Delaware Company) to a
newly-formed company, J. Ray McDermott, S.A., in connection with the
combination of McDermott International's marine construction businesses with
those of Offshore Pipelines, Inc. When this transaction is completed, J. Ray
McDermott, S.A. will be a subsidiary of International. In order to consummate
the transaction, the Delaware Company will sell marine construction assets to
International for approximately $230,000,000. After the sale, the proceeds
will be held by the Delaware Company and will only be available to International
subject to the covenant restrictions described above.
21
<PAGE> 22
Working capital decreased to $103,935,000 at September 30, 1994 from
$172,690,000 at March 31, 1994. During the remainder of fiscal year 1995, the
Delaware Company expects to obtain funds to meet working capital and capital
expenditure requirements from additional borrowings, if needed. Leasing
agreements for equipment, which are short-term in nature, are not expected to
impact the Delaware Company's liquidity nor capital resources.
The Delaware Company's quarterly dividends of $0.55 per share on the Series A
$2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series
B $2.60 Cumulative Preferred Stock were the same for the three and six months
ended September 30, 1994 and 1993.
The Delaware Company has provided a valuation allowance ($25,687,000 at
September 30, 1994) for deferred tax assets which cannot be realized through
carrybacks and future reversals of existing taxable temporary differences.
Management believes that remaining deferred tax assets ($775,177,000 at
September 30, 1994) are realizable through carrybacks and future reversals of
existing taxable temporary differences and, if necessary, the implementation of
tax planning strategies involving sales and sale/leasebacks of appreciated
assets. Major uncertainties that affect the ultimate realization of deferred
tax assets include the risks of incurring operating losses in the future and
the possibility of declines in value of appreciated assets involved in
identified tax planning strategies. These factors have been considered in
determining the valuation allowance. Management will continue to assess the
adequacy of the valuation allowance on a quarterly basis.
The Delaware Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective April 1, 1992 for all
domestic plans. The Delaware Company plans to adopt SFAS No. 106 for foreign
plans during fiscal year 1996 and the adoption is not expected to have a
material effect on the consolidated financial statements of the Delaware
Company. The new standard does not have any impact on the cash requirements of
any domestic or foreign postretirement health and welfare plan.
22
<PAGE> 23
PART II
McDERMOTT INCORPORATED
OTHER INFORMATION
No information is applicable to Part II for the current quarter, except as
noted below:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
There were no current reports on Form 8-K filed during
the three months ended September 30, 1994.
Signatures
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INCORPORATED
(REGISTRANT)
Date: 11/14/94 By: /s/ Brock A. Hattox
(SIGNATURE)
Brock A. Hattox
Senior Vice President and
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INCORPORATED'S SEPTEMBER 30, 1994 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> SEP-30-1994
<CASH> 21,695
<SECURITIES> 129,532
<RECEIVABLES> 278,887
<ALLOWANCES> 7,842
<INVENTORY> 293,315
<CURRENT-ASSETS> 1,068,074
<PP&E> 1,449,897
<DEPRECIATION> 956,806
<TOTAL-ASSETS> 3,452,814
<CURRENT-LIABILITIES> 964,139
<BONDS> 434,736
0
179,719
<COMMON> 4
<OTHER-SE> 419,058
<TOTAL-LIABILITY-AND-EQUITY> 3,452,814
<SALES> 1,112,477
<TOTAL-REVENUES> 1,112,477
<CGS> 1,126,984
<TOTAL-COSTS> 1,126,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,788
<INCOME-PRETAX> (45,762)
<INCOME-TAX> 4,031
<INCOME-CONTINUING> (49,793)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (512)
<NET-INCOME> (50,305)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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